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Principles of Taxation for Business and
Investment Planning 2013 16th Edition

Jones Test Bank
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Chapter 08 - Property Dispositions
Chapter 08
Property Dispositions
True / False Questions
1. Gain or loss realized on the disposition of property is recognized unless the tax law provides
a nonrecognition exception.
True False
2. According to the realization principle, an increase in the value of an asset is not accounted for
as income unless the amount of the increase can be accurately measured.
True False
3. Mr. Hickem sold an investment asset worth $20,000. The purchaser paid Mr. Hickem by
giving him $12,500 cash and an oil painting worth $7,500. Mr. Hickem's amount realized on
sale is $12,500.
True False
4. N&B Inc. sold land worth $385,000. The purchaser paid $80,000 cash and assumed N&B's
$305,000 mortgage on the land. N&B's amount realized on sale is $385,000.
True False
5. Four years ago, Mrs. Beights purchased marketable securities for $75,000 cash. At the end of
2011, the FMV of the securities had plummeted to $4,000. Mrs. Beights may elect to recognize
her $71,000 loss in 2011, even though she still owns the securities.
True False
6. Kopel Company transferred an inventory asset to Cassim LLC in exchange for Cassim's
$230,000 interest-bearing note. Kopel's tax basis in the note is its $230,000 face value.
True False
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7. Mrs. Lex realized a $78,400 gain on sale of investment land to S&T, which issued a 10-year
note in full payment. Mrs. Lex must recognize the gain in the year of sale unless she elects to
use the installment sale method to recognize gain over the term of the note.
True False
8. A taxpayer that is using the installment sale method to recognize gain must recompute the
gross profit percentage every year during the term of the installment note.
True False
9. The use of the installment sale method can result in an unfavorable difference between book
income and taxable income in the year of sale.
True False
10. The installment sale method of accounting is not applicable to realized losses.
True False
11. A corporation can use the installment sale method of accounting for both book and tax
purposes.
True False
12. Mr. and Mrs. Plame sold an investment asset to their grandson Leonard. Because Leonard is
a related party, the Plames do not recognize any gain or loss realized on sale.
True False
13. Sandy Cole realized a loss on sale of an investment asset to her mother, Lynne. If the facts
and circumstances prove that the selling price was an arm's length market price, Sandy can
recognize the loss.
True False
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14. The gain or loss recognized on any disposition of a capital asset is characterized as capital
gain or loss.
True False
15. The characterization of income as ordinary or capital gain has no relevance for financial
reporting purposes.
True False
16. The same asset may be an ordinary asset in the hands of one taxpayer and a capital asset in
the hands of a different taxpayer.
True False
17. For tax purposes, every asset is a capital asset unless it falls into one of eight categories of
noncapital assets.
True False
18. Every gain or loss realized on the disposition of property is ultimately characterized as
either ordinary or capital for tax purposes.
True False
19. Both corporate and individual taxpayers can deduct capital losses to the extent of capital
gains.
True False
20. Both corporate and individual taxpayers can carry back a net capital loss to the three prior
taxable years.
True False
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21. Both corporate and individual taxpayers may be taxed at a preferential rate on net capital
gain.
True False
22. Because land is nondepreciable, it is always a capital asset.

True False
23. The sale of business inventory always generates ordinary income or loss.
True False
24. Verno Inc. purchased business equipment in March and sold it in November. Verno's gain
or loss recognized on the sale is ordinary.
True False
25. A taxpayer cannot compute its net Section 1231 gain or loss for a taxable year until the year
closes.
True False
26. The general rule is that a net Section 1231 loss is treated as a capital loss and a net Section
1231 gain is treated as ordinary income.
True False
27. JG Inc. recognized $690,000 ordinary income, $48,000 net Section 1231 gain, and $77,000
net capital loss this year. JG's taxable income is $690,000.
True False
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28. Langtry Corporation recognized $798,000 ordinary income, $13,000 net Section 1231 loss,
and $6,000 net capital loss this year. Langtry's taxable income is $785,000.
True False
29. Tullia Inc. recognized $500,000 ordinary income, $22,600 net Section 1231 gain, and
$6,000 net capital loss this year. Tullia's taxable income is $522,600.
True False
30. Milton Inc. recognized a $1,300 net Section 1231 loss in 2011. If Milton recognizes a
$5,000 net Section 1231 gain in 2012, it must characterize $1,300 as ordinary income.
True False
31. Milton Inc. recognized a $16,900 gain on sale of depreciable equipment held for three years.
If Milton's accumulated MACRS depreciation on the equipment is $16,900 or more, the entire
gain is ordinary income.
True False
32. Stone Company recognized a $7,700 loss on sale of depreciable equipment held for three
years. If Stone's accumulated MACRS depreciation on the equipment is $7,700 or more, the
entire loss is ordinary.
True False
33. Mr. Jason realized a gain on sale of a residential apartment complex that he had placed in
service in 1993. Accumulated MACRS depreciation on the complex was $311,800. The entire
gain is characterized as Section 1231 gain.
True False
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34. CBM Inc. realized a $429,000 gain on sale of a commercial office building that the
corporation placed in service in 1993. Accumulated MACRS depreciation on the complex was
$311,800. The entire gain is characterized as Section 1231 gain.
True False
35. The abandonment of business equipment with a $6,019 adjusted basis results in a $6,019
Section 1231 loss.
True False
36. Ms. Cregg has a $43,790 basis in 2,460 shares of ABD Inc. common stock. ABD recently
declared bankruptcy and announced that its common stock is worthless. As a result, Ms. Cregg
can recognize a $43,790 ordinary loss.
True False
37. Abada Inc. has a $925,000 basis in 100% of the stock of AbWest Inc., which derives all its
income from a manufacturing activity. If Abada determines that the AbWest stock is worthless,
it can recognize a $925,000 ordinary loss.
True False
38. Netelli Inc. owned a tract of land with a $175,000 basis that was subject to a $228,500
nonrecourse mortgage. Netelli defaulted on the mortgage, and the creditor foreclosed on the
land. Netelli must recognize a $53,500 gain on the disposition of the land.
True False
39. A fire destroyed business equipment that was worth $100,000 and had a $118,100 adjusted
tax basis. The equipment was uninsured. The owner can recognize a $118,100 ordinary casualty
loss.
True False
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loss.
True False
41. A casualty loss realized on the destruction of depreciable business property is characterized
as a Section 1231 loss.
True False
Multiple Choice Questions
42. Lenoci Inc. paid $310,000 for equipment three years ago. This year, it sold the equipment
for $200,000. Through date of sale, accumulated book depreciation was $93,840 and
accumulated tax depreciation was $147,327. Which of the following statements is true?
A. The sale results in a $53,487 favorable temporary book/tax difference.
B. The sale results in a $53,487 unfavorable temporary book/tax difference.
C. The sale results in a $53,487 unfavorable permanent book/tax difference.
D. None of the above is true.
43. Skeen Company paid $90,000 for tangible personalty three years ago and elected to expense
and deduct the cost under Section 179. This year, Skeen sold the personalty for $52,700.
Accumulated book depreciation through date of sale was $31,000. What is the effect of the sale
on Skeen's book income and taxable income?
A. $6,300 book loss: $52,700 tax gain
B. $6,300 book loss; -0- tax gain
C. $6,300 book and tax gain
D. None of the above
8-7
44. Noble Inc. paid $310,000 for equipment three years ago. This year, it sold the equipment for
$200,000. Through date of sale, accumulated book depreciation was $93,840 and accumulated
tax depreciation was $147,327. Assuming a 35% tax rate, what is the effect of the sale on
Noble's deferred tax accounts?
A. $18,720 increase in deferred tax assets
B. $18,720 increase in deferred tax liabilities
C. $18,720 decrease in deferred tax liabilities
D. No effect on deferred tax accounts
45. Six years ago, Alejo Company purchased real property by paying $250,000 cash and giving
the seller its $1 million note for the balance of the purchase price. This year, Alejo deducted
$30,800 depreciation on the property and made a $125,000 principal payment on the note.
Which of the following statements is false?
A. The depreciation deduction reduced Alejo's adjusted tax basis in the real property.
B. The principal payment increased Alejo's equity in the real property.
C. The principal payment reduced Alejo's tax basis in the real property and the balance due on
the note.
D. None of the above statements is false.
46. O&V sold an asset with a $78,300 adjusted tax basis for $100,000. The purchaser paid
$30,000 in cash and assumed O&V's $70,000 mortgage on the asset. Compute O&V's net cash
flow from the sale assuming a 35% tax rate.
A. $22,405
B. $13,095
C. $14,105
47. This year, Ms Lucas sold investment land for $125,000 cash plus the purchaser's
assumption of a $50,000 mortgage on the land. Ms. Lucas's tax basis in the land was $93,000. If
any recognized gain is taxed at 15 percent, compute the after-tax cash flow from the sale.
A. $62,300
B. $69,700
C. $112,700
D. $162,700
8-8
48. Philp Inc. sold equipment with a $132,900 adjusted tax basis for $200,000. The purchaser
paid $20,000 in cash and assumed Philp's $180,000 mortgage on the asset. Compute Philp's net
cash flow from the sale assuming a 35% tax rate.
A. $23,485
B. $20,000
C. -0-
49. Winslow Company sold investment land to an unrelated purchaser. The purchaser paid
$250,000 cash, assumed Winslow's $600,000 mortgage on the land, and gave Winslow its
$580,000 ten-year, interest-bearing note. Compute Winslow's amount realized on sale.
A. $250,000
B. $830,000
C. $850,000
D. $1,430,000
50. The installment sale method of accounting applies to which of the following?
A. $89,300 gain realized on sale of business inventory.
B. $798,600 gain realized on sale of common stock in a publicly held corporation.
C. $(41,500) loss realized on sale of land used in a trade or business.
51. O&V sold a business asset with a $78,300 adjusted tax basis for $100,000. The purchaser
paid $30,000 in cash and gave O&V a note for the $70,000 balance of the price. O&V will not
receive a payment on the note until next year. Compute O&V's gain recognized under the
installment sale method.
A. $7,690
B. $6,510
C. $4,920
8-9
52. Dolzer Inc. sold a business asset with a $474,000 adjusted book and tax basis for $775,000.
The purchaser paid $100,000 in cash and gave Dolzer a note for the $675,000 balance of the
price. Dolzer will not receive a payment on the note until next year. Assuming that Dolzer uses
the installment sale method, compute Dolzer's book and tax gain in the year of sale.
A. Book gain $301,000; tax gain $100,000
B. Book and tax gain $38,839
C. Book gain $301,000; tax gain $38,839
53. In 2011, TPC Inc. sold investment land with a $474,000 book and tax basis for $775,000.
The purchaser paid $100,000 in cash and gave TPC a note for the $675,000 balance of the price.
In 2012, TPC received a $105,500 payment on the note ($67,500 principal + $38,000 interest).
Assuming that TPC is using the installment sale method, compute its gain recognized in 2011.
A. $26,216
B. $40,976
C. $67,500
In 2012, TPC received a $67,800 payment on the note ($40,000 principal + $27,800 interest). In
2012, TPC's use of the installment sale method results in a:
A. $10,325 favorable permanent book/tax difference
B. $17,496 unfavorable temporary difference
C. $17,496 favorable temporary difference
55. The installment sale method of accounting does not apply to which of the following sales?
A. Sale of 12-acre tract of land held as inventory by a real estate developer
B. Sale of business equipment
C. Sale of U.S. Treasury notes
D. The method does not apply to a. and c.
8-10
56. In 2007, ChaGo Inc. sold a business asset with a $39,400 adjusted tax basis for $130,000.
The purchaser paid $50,000 cash and gave ChaGo a note for the $80,000 balance of the price.
ChaGo is using the installment sale method to recognize its gain on sale. This year, ChaGo sold
the note to a financial institution for the note's $55,000 face value (ChaGo had received a total
of $25,000 principal payments on the note.) Compute ChaGo's gain recognized on sale of the
installment note.
A. -0-
B. $38,332
C. $52,268
D. $55,000
57. Mr. Quick sold marketable securities with a $112,900 tax basis to his 100% owned
corporation for $95,000 cash. Which of the following statements is true?
A. If Mr. Quick can offer evidence that the FMV of the securities is $95,000, he can recognize
his $17,900 realized loss.
B. If Mr. Quick and his corporation negotiated the terms of the sale at arm's length, Mr. Quick
can recognize his $17,900 realized loss.
C. The corporation's tax basis in the securities is $112,900.
58. Mrs. Beld sold marketable securities with a $79,600 tax basis to her daughter for $60,000
cash. Two years later, the daughter sold the securities through her broker for $93,000. Compute
the daughter's gain recognized on sale.
A. $13,400
B. $19,600
C. $33,000
59. Mr. Quick sold marketable securities with a $112,900 tax basis to his son for $95,000 cash.
Two years later, the son sold the securities through his broker for $90,000. Compute the son's
loss recognized on sale.
A. -0-
B. $5,000
C. $22,900
8-11
60. Warsham Inc. sold land with a $300,000 basis to Sara Phillips for $117,000 cash. Sara owns
68 percent of Warsham's outstanding stock. Which of the following statements is true?
A. Warsham cannot recognize its $183,000 realized loss on sale on its current year tax return.
B. Warsham does not report the $183,000 realized loss on its current year financial statements.
C. The $183,000 loss is an unfavorable temporary difference between Warsham's book and tax
income.
D. Both a. and c. are true.
61. Which of the following is a capital asset?

A. Accounts receivable of an accrual basis business
B. Business equipment
C. Self-created goodwill
D. Purchased goodwill
62. Which of the following is a capital asset?

A. Supplies used in a business
B. Business inventory
C. Land used in a business
63. "Tiny Dancer" is the name of a bronze figurine created by artist Diego Ossa. The owner
recently recognized a $43,500 gain on sale of the figurine. Which of the following statements is
false?
A. If Diego Ossa was the seller, the gain is ordinary.
B. If a commercial art gallery that had held Tiny Dancer in its inventory was the seller, the gain
is ordinary.
C. If a private collector who purchased Tiny Dancer from an art gallery was the seller, the gain
is capital gain.
D. None of the above is false.
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64. Gupta Company made the following sales of capital assets this year.
What is the effect of the three sales on Gupta's taxable income?

A. $700 increase
B. $12,900 increase
C. No effect
65. R&T Inc. made the following sales of capital assets this year.
What is the effect of the three sales on R&T's taxable income this year?
A. $21,600 increase
B. $12,900 increase
C. No effect
66. Rizzi Corporation sold a capital asset with a $692,000 book and tax basis for $650,000 cash.
This was Rizzi's only asset sale during the year. The sale results in:
A. $42,000 unfavorable permanent book/tax difference
B. $42,000 unfavorable temporary book/tax difference
C. $42,000 favorable permanent book/tax difference
D. No book/tax difference
8-13
67. Fantino Inc. was incorporated in 2008 and adopted a calendar year for tax purposes. Here is
a schedule of Fantino's taxable income for 2008 and 2009.
In 2010, Fantino generated $297,300 ordinary income and recognized a $14,000 net capital loss.
Which of the following statements is true?
A. Fantino can deduct its $14,000 net capital loss only on a carryforward basis.
B. Fantino can carry the net capital loss back to 2008 and receive a $4,760 refund of 2008 tax.
C. Fantino can carry the net capital loss back to 2009 and receive a $5,460 refund of 2009 tax.
D. Fantino can carry the net capital loss back to 2009 and receive a $2,262 refund of 2009 tax.
68. Mr. and Mrs. Sykes operate a very profitable small business. This year, the Sykes
recognized a $100,000 gain on sale of a trade name they had created and copyrighted for use in
their business in 1994. Which of the following statements is true?
A. The $100,000 gain is capital gain eligible for a preferential tax rate.
B. The $100,000 gain is capital gain against which the Sykes can deduct any capital losses
recognized this year.
C. The $100,000 gain is ordinary business income.
D. Statements a. and b. are true.
69. Schatz Corporation generated $8,083,000 ordinary business income and recognized a
$73,900 net capital gain on the sale of assets. Which of the following statements is true?
A. Schatz must pay tax at the regular corporate rates on $8,156,900 taxable income.
B. Schatz must pay tax at the regular corporate rates on $8,083,000 taxable income. The
$73,900 capital gain is eligible for a preferential tax rate.
C. Schatz's net capital gain results in a permanent book/tax difference.
8-14
70. Norbett Inc. generated $15,230,000 ordinary taxable income and realized a $238,000 net
capital loss on the sale of marketable securities this year. Which of the following statements is
false?
A. Norbett's net income per books includes the $238,000 net capital loss.
B. Norbett's taxable income is $15,230,000.
C. The $238,000 net capital loss is a favorable book/tax difference.
D. The $238,000 net capital loss is a temporary book/tax difference.
71. Hugo Inc., a calendar year taxpayer, sold two operating assets this year. The first sale
generated a $38,700 Section 1231 gain, and the second sale generated a $59,400 Section 1231
loss. As a result of these sales, Hugo should recognize:
A. $20,700 ordinary loss
B. $38,700 Section 1231 gain treated as capital gain and $59,400 ordinary loss
C. $20,700 capital loss
72. In its current tax year, PRS Corporation generated $300,000 ordinary income from the
performance of consulting services for its clients. PRS sold two assets, recognizing a $20,000
gain on the first sale and a $31,000 loss on the second sale. Which of the following statements is
false?
A. If the gain and loss were capital gain and loss, PRS's taxable income was $300,000.
B. If the gain was capital gain and the loss was ordinary, PRS's taxable income was $269,000.
C. If the gain and loss were ordinary, PRS's taxable income was $289,000.
D. If the gain was ordinary and the loss was a capital loss, PRS's taxable income was $320,000.
73. Benlow Company., a calendar year taxpayer, sold two operating assets this year. The first
sale generated a $19,200 Section 1231 loss, and the second sale generated a $33,600 Section
1231 gain. As a result of these sales, Benlow should recognize:
A. $19,200 ordinary loss and $33,600 gain treated as capital gain.
B. $14,400 gain treated as capital gain.
C. $14,400 ordinary income.
8-15
74. Which of the following is a Section 1231 asset?

A. Business inventory
B. Business accounts receivable
C. Supplies used in a business
D. None of the above is a Section 1231 asset
75. Which of the following assets is not a Section 1231 asset?

A. Business equipment held for four years
B. Office furniture held for eight months
C. Land used in a business and held for 16 years
D. All of the above are Section 1231 assets
76. Proctor Inc. was incorporated in 2004 and adopted a calendar year. Here is a schedule of
Proctor's net Section 1231 gains and (losses) reported on its tax returns through 2009.
In 2010, Proctor recognized a $25,000 gain on the sale of business land. How is this gain
characterized on Proctor's tax return?
A. $25,000 Section 1231 gain
B. $19,700 ordinary gain and $5,300 Section 1231 gain
C. $15,900 ordinary gain and $9,100 Section 1231 gain
D. $25,000 ordinary gain
8-16
77. Delour Inc. was incorporated in 2004 and adopted a calendar year. Here is a schedule of
Delour's net Section 1231 gains and (losses) reported on its tax returns through 2009.
In 2010, Delour recognized a $50,000 gain on the sale of business land. How is this gain
characterized on Delour's tax return?
D. $50,000 ordinary gain
78. Irby Inc. was incorporated in 2005 and adopted a calendar year. Here is a schedule of Irby's
net Section 1231 gains and (losses) reported on its tax returns through 2010.
In 2011, Irby recognized a $14,750 gain on the sale of business land. How is this gain
characterized on Irby's tax return?
C. $14,750 ordinary gain
8-17
79. This year, Adula Company sold equipment purchased in 2008 at a cost of $117,200.
Accumulated depreciation through date of sale was $33,000. Which of the following statements
is false?
A. If the sale price was $90,000, Adula recognized $5,800 ordinary gain.
B. If the sale price was $120,000 Adula recognized $33,000 ordinary gain and $2,800 Section
1231 gain.
C. If the sale price was $80,000, Adula recognized $4,200 ordinary loss.
80. This year, Izard Company sold equipment purchased in 2008 at a cost of $48,500.
Accumulated depreciation through date of sale was $18,900. Which of the following statements
is false?
A. If the sale price was $25,000, Izard recognized $4,600 Section 1231 loss.
B. If the sale price was $42,500, Izard recognized $18,900 Section 1231 gain.
C. If the sale price was $50,000, Izard recognized $18,900 ordinary gain and $1,500 Section
1231 gain.
81. Several years ago, Nipher paid $70,000 to purchase equipment to use in its business. This
year, it sold the equipment for $76,500. Accumulated MACRS depreciation through date of
sale was $18,000. Determine the amount and character of Nipher's gain recognized.
A. $24,500 ordinary gain
B. $24,500 Section 1231 gain
C. $18,000 ordinary gain and $6,500 capital gain
D. $18,000 ordinary gain and $6,500 Section 1231 gain
82. Mr. and Mrs. Churchill operate a small business. This year, the Churchills sold a
commercial office building used in their business for $1.5 million. They purchased the building
in 1996 for a cost of $1.4 million and had deducted $538,000 MACRS depreciation through
date of sale. The Churchills should characterize the $638,000 gain recognized on sale as:
A. Ordinary gain
B. Capital gain
D. Section 1231 gain
8-18
83. Kuong Inc. sold a commercial office building used in the corporate business for $1.5
million. Kuong purchased the building in 1996 for a cost of $1.4 million and had deducted
$538,000 MACRS depreciation through date of sale. Kuong should characterize the $638,000
gain recognized on sale as:
A. $127,600 ordinary gain and $510,400 Section 1231 gain
D. Section 1231 gain
84. Mr. and Mrs. Marley operate a small business. This year, the Marleys sold a commercial
office building used in their business for $1.1 million. They purchased the building in 1998 for
a cost of $900,000 and have deducted $300,000 MACRS depreciation through date of sale. The
Marleys should characterize the $500,000 gain recognized on sale as:
A. Capital gain
B. Section 1231 gain
85. B&I Inc. sold a commercial office building used in the corporate business for $862,000.
B&I purchased the building in 2002 for a cost of $700,000 and had deducted $167,200 MACRS
depreciation through date of sale. B&I should characterize the $329,200 gain recognized on
sale as:
A. $167,200 ordinary gain and $162,000 Section 1231 gain
B. Section 1231 gain
C. Capital gain
86. Which of the following statements about Section 1250 recapture rule is false?
A. The rule applies to sales of depreciable realty by noncorporate taxpayers but not to sales by
corporate taxpayers.
B. The rule applies only to sales of depreciable realty placed in service before 1987.
C. The rule applies only to sales of depreciable realty for which an accelerated tax depreciation
method was used.
D. The rule has no effect on the characterization of gain recognized on sale of any realty with a
zero tax basis.
8-19
87. Firm F purchased a commercial office building for business use in 2001 for $965,000. This
year, the firm sold the building for $1 million. Accumulated MACRS depreciation through date
of sale was $275,000. Which of the following statements is true?
A. If Firm F is a corporation, it recognizes $55,000 ordinary income and $255,000 Section 1231
gain.
B. If Firm F is a corporation, it recognizes $62,000 ordinary income and $248,000 Section 1231
gain.
C. If Firm F is a noncorporate taxpayer, it recognizes $310,000 Section 1231 gain.
D. Both a. and c. are true.
88. Zeron Inc. generated $1,349,600 ordinary income from operations this year. It also
recognized $29,200 recaptured ordinary income, $21,000 net Section 1231 gain, and $14,900
net capital loss on the sale of assets. Compute Zeron's taxable income.
A. $1,349,000
B. $1,378,800
C. $1,384,900
D. $1,399,800
89. Lettuca Inc. generated a $77,050 ordinary loss from operations this year. It also recognized
$5,920 recaptured ordinary income, $55,000 net Section 1231 loss, and $7,840 net capital loss
on the sale of assets. Compute Lettuca's net operating loss.
A. $(77,050)
B. $(126,130)
C. $(132,050)
D. $(133,970)
90. Delta Inc. generated $668,200 ordinary income from operations this year. It also recognized
$3,910 recaptured ordinary income, $5,000 net Section 1231 gain, and $14,600 net capital loss
on the sale of assets. Compute Delta's taxable income.
A. $672,100
B. $677,100
C. $668,200
D. $697,700
8-20
91. Bastrop Inc. generated a $169,000 ordinary loss from operations this year. It also
recognized $35,920 recaptured ordinary income, $18,000 net Section 1231 loss, and $125,750
net capital gain on the sale of assets. Compute Bastrop's net operating loss.
A. $(169,000)
B. $(133,080)
C. $(151,080)
D. $(25,330)
92. Twelve years ago, Mr. and Mrs. Bathgate purchased a business. This year, they sold the
business for $750,000 lump-sum payment. The business had the following balance sheet assets.
As a result of the sale, the Bathgates should recognize:

A. $324,900 ordinary gain
B. $104,800 ordinary gain and $220,100 capital gain
8-21
93. Two months ago, Dawes Inc. broke a multi-year lease on office space that it had occupied
for four years. Three years ago, Dawes paid $85,300 to install carpeting and new electrical
fixtures throughout the office. Accumulated depreciation through the date that Dawes vacated
the office was $51,000. What is the tax consequence of Dawes' abandonment of the carpeting
and fixtures?
A. Dawes has no tax consequence because it did not sell or exchange these assets.
B. $34,300 capital loss.
C. $34,300 ordinary loss.
D. $34,300 Section 1231 loss.
94. Several years ago, Y&S Inc. purchased a patent on a production process for $250,000 and
has amortized $91,000 of the cost. Y&S has learned that a rival company recently developed a
new process that renders the patent worthless. Consequently, Y&S made a public
announcement that it would no longer enforce the patent. What is the tax consequence to Y&S
of this unfortunate situation?
A. $159,000 ordinary abandonment loss.
B. $159,000 capital loss.
C. $159,000 Section 1231 loss.
D. Y&S has no tax consequences because it did not sell or exchange the patent.
95. Mrs. Tinker paid $78,400 to purchase 15,000 shares of HiFli common stock in 2004. This
year, HiFli declared bankruptcy and announced that its stock has no value. What is the tax
consequence to Mrs. Tinker of this bad news?
A. $78,400 ordinary abandonment loss
B. $78,400 capital loss
C. No loss recognition until Mrs. Tinker actually disposes of the stock
8-22
96. DiLamer Inc. paid $300,000 to purchase 30-year bonds issued by a publicly held foreign
corporation. The foreign government recently privatized the corporation and declared that all
outstanding corporate debt obligations would not be honored. What is the tax consequence to
DiLamer of this bad news?
A. No loss recognition until DiLamer actually disposes of the bonds.
B. $300,000 Section 1231 loss.
C. $300,000 capital loss.
D. $300,000 ordinary abandonment loss.
97. Princetown Inc. has a $4.82 million basis in 88% of the outstanding stock of Merryvale
Corporation. Merryvale manufactures Christmas decorations, cards, and wrapping paper.
Princetown's board of directors recently learned that Merryvale is bankrupt. The board voted
unanimously to dissolve the corporation and distribute all assets to Merryvale's creditors. What
is the tax consequence to Princetown of the board's actions?
A. No loss recognition until Princetown actually disposes of the Merryvale stock.
B. $4.82 million Section 1231 loss.
C. $4.82 million capital loss.
D. $4.82 million ordinary loss.
98. Mrs. Stile owns investment land subject to a $600,000 nonrecourse mortgage. Her basis in
the land is $212,000, and the land's appraised FMV is $575,000. Mrs. Stile is considering
defaulting on the mortgage and allowing the creditor to foreclose. If Mrs. Stile disposes of the
land through a foreclosure, she will recognize:
A. $212,000 capital loss
B. $212,000 ordinary abandonment loss
C. $363,000 capital gain
D. $388,000 capital gain
8-23
99. Steiger Company owned investment land subject to a $715,000 recourse mortgage. Steiger
failed to make timely mortgage payments, so the creditor foreclosed. At date of foreclosure,
Steiger's basis in the land was $587,300, and the land's appraised FMV was $690,000. Steiger
completely settled its recourse debt by paying $25,000 cash to the creditor. As a result of the
foreclosure, Steiger recognizes:
A. $102,700 capital gain and $25,000 ordinary loss
B. $612,300 ordinary loss
C. $102,700 capital gain
100. Ficia Inc. owned investment land subject to a $294,500 recourse mortgage. Ficia failed to
make timely mortgage payments, so the creditor foreclosed. At date of foreclosure, Ficia's basis
in the land was $300,000, and the land's appraised FMV was $260,000. The creditor informed
Ficia that it would not pursue collection of the $34,500 unpaid balance of the mortgage. Which
of the following statements is true?
A. Ficia recognizes $34,500 ordinary income and a $40,000 capital loss.
B. Ficia recognizes only a $40,000 capital loss.
C. Ficia recognizes only a $5,500 capital loss.
101. Blitza Inc. owned real property used for 12 years in its business that was subject to a
$294,500 nonrecourse mortgage. Blitza failed to make timely mortgage payments, so the
creditor foreclosed. At date of foreclosure, Blitza's basis in the property was $300,000, and the
property's appraised FMV was $260,000. Which of the following statements is true?
A. Blitza has no legal obligation to settle the $34,500 unpaid balance of the mortgage.
B. Blitza recognizes a $40,000 Section 1231 loss.
C. Blitza recognizes a $5,500 Section 1231 loss.
D. Statements a. and c. are true.
8-24
102. A fire completely destroyed a warehouse owned by Della Company and used for nine
years in its shipping business. Della's adjusted basis in the warehouse was $748,200, and its
replacement value was $1 million. Unfortunately, the warehouse was uninsured. As a result of
the destruction, Della recognizes:
A. $1 million ordinary loss
B. $748,200 ordinary loss
C. $748,200 Section 1231 loss
103. Thieves stole computer equipment owned by Eaton Company and used for three years in
its consulting business. Eaton's adjusted basis in equipment was $23,200, and its replacement
value was $50,000. Eaton's insurance company paid only $15,000 on Eaton's claim for the theft
loss. As a result, Eaton recognizes:
A. $35,000 ordinary loss
B. $8,200 Section 1231 loss
C. $8,200 ordinary loss
104. A tornado demolished several delivery vans owned for three years by Wadham Company.
Wadham's adjusted basis in the vans was $28,400, and Wadham paid $90,000 to purchase new
vans. Wadham received a $25,000 settlement from its casualty insurance company.
Consequently, Wadham recognizes:
A. $3,400 Section 1231 loss
B. $65,000 Section 1231 loss
C. $65,000 ordinary loss
8-25
Essay Questions
105. Oslego Company, a calendar year taxpayer, sold land with a $400,000 tax basis for
$635,000 in March 2012. The purchaser paid $50,000 cash at closing and gave Oslego an
interest-bearing note for the $585,000 remaining price. In September, Oslego received $50,450
cash from the purchaser consisting of a $29,250 principal payment and a $21,200 interest
payment. Assuming that Oslego does not elect out of the installment sale method, compute the
company's 2012 gain recognized on sale and its tax basis in the note receivable on December
31.
106. Nolan Inc. sold marketable securities with a $223,000 basis to Totem Company. Compute
Nolan's recognized gain or loss assuming that:
a. Nolan's amount realized on sale was $160,000, and Nolan and Totem are unrelated parties.
b. Nolan's amount realized on sale was $275,000, and Nolan and Totem are unrelated parties.
c. Nolan's amount realized on sale was $160,000, and Nolan and Totem are related parties.
d. Nolan's amount realized on sale was $275,000, and Nolan and Totem are related parties.
8-26
107. WQP Company generated $1,814,700 ordinary income from the sale of inventory to its
customers. It also sold three noninventory assets during the year. Compute WQP's taxable
income assuming that:
a. The first sale resulted in a $10,400 ordinary gain, the second sale resulted in a $23,900 capital
loss, and the third sale resulted in a $44,000 capital gain.
b. The first sale resulted in a $79,100 capital loss, the second sale resulted in a $35,200 ordinary
loss, and the third sale resulted in a $16,000 capital gain.
108. Dender Company sold business equipment with a $386,000 initial cost basis and $171,000
accumulated tax depreciation. Compute Dender's recaptured ordinary income and Section 1231
gain or loss recognized if the amount realized on sale was:
a. $200,000
b. $300,000
c. $400,000
8-27
109. Murrow Corporation generated $285,700 income from the performance of services for its
clients. Murrow also sold several operating assets during the year. Compute Murrow's taxable
income under each of the following assumptions about the tax consequences of the asset sales.
a. Murrow recognized $6,800 recaptured ordinary income, a $23,200 net Section 1231 gain,
and an $11,600 net capital loss.
b. Murrow recognized a $47,300 net Section 1231 loss and a $5,075 net capital loss.
c. Murrow recognized a $61,800 net Section 1231 gain and a $4,210 net capital gain.
d. Murrow recognized a $15,300 net Section 1231 loss and a $3,000 net capital gain.
110. McOwen Inc. reported $6,029,400 net income before tax on this year's financial
statements prepared in accordance with GAAP. The corporation's records reveal the following
information.
● A tornado destroyed an office building and its contents. McOwen's book basis in the building
and contents was $4,100,000 and its tax basis in the building and contents was $1,539,000.
McOwen's reimbursement from its insurance company was $1 million.
● Four years ago, McOwen realized a $90,000 gain on the sale of investment property and
elected the installment sale method to report the gain for tax purposes. Its gross profit
percentage is 37.45%, and it received a $40,000 principal payment on its installment note this
year.
● Net income per books includes a $13,670 net capital gain. McOwen has a $63,000 capital loss
carryforward into the current year.
● Depreciation expense per books was $111,400, and MACRS depreciation was $398,100.
Compute McOwen's taxable income.
8-28
Chapter 08 Property Dispositions Answer Key
True / False Questions
1. Gain or loss realized on the disposition of property is recognized unless the tax law provides
a nonrecognition exception.
TRUE
Difficulty: 2 Medium
Learning Objective: 08-01 Distinguish between gain or loss realization and recognition.
2. According to the realization principle, an increase in the value of an asset is not accounted for
as income unless the amount of the increase can be accurately measured.
FALSE
3. Mr. Hickem sold an investment asset worth $20,000. The purchaser paid Mr. Hickem by
giving him $12,500 cash and an oil painting worth $7,500. Mr. Hickem's amount realized on
sale is $12,500.
FALSE
Difficulty: 1 Easy
8-29
4. N&B Inc. sold land worth $385,000. The purchaser paid $80,000 cash and assumed N&B's
$305,000 mortgage on the land. N&B's amount realized on sale is $385,000.
TRUE
Difficulty: 1 Easy
5. Four years ago, Mrs. Beights purchased marketable securities for $75,000 cash. At the end of
2011, the FMV of the securities had plummeted to $4,000. Mrs. Beights may elect to recognize
her $71,000 loss in 2011, even though she still owns the securities.
FALSE
Difficulty: 1 Easy
6. Kopel Company transferred an inventory asset to Cassim LLC in exchange for Cassim's
$230,000 interest-bearing note. Kopel's tax basis in the note is its $230,000 face value.
TRUE
Learning Objective: 08-02 Apply the installment sale method of accounting.
7. Mrs. Lex realized a $78,400 gain on sale of investment land to S&T, which issued a 10-year
note in full payment. Mrs. Lex must recognize the gain in the year of sale unless she elects to
use the installment sale method to recognize gain over the term of the note.
FALSE
The installment sale method is the default - Mrs. Lex can elect not to use it.
8-30
8. A taxpayer that is using the installment sale method to recognize gain must recompute the
gross profit percentage every year during the term of the installment note.
FALSE
9. The use of the installment sale method can result in an unfavorable difference between book
income and taxable income in the year of sale.
FALSE
Any book/tax difference in the year of sale is favorable because of the deferral of income
recognition under the installment sale method.
10. The installment sale method of accounting is not applicable to realized losses.
TRUE
Difficulty: 1 Easy
11. A corporation can use the installment sale method of accounting for both book and tax
purposes.
FALSE
Difficulty: 1 Easy
8-31
12. Mr. and Mrs. Plame sold an investment asset to their grandson Leonard. Because Leonard is
a related party, the Plames do not recognize any gain or loss realized on sale.
FALSE
The Plames would recognize gain on the sale; only losses on sales to related parties are
disallowed.
Learning Objective: 08-03 Explain why the tax law disallows losses on related party sales.
13. Sandy Cole realized a loss on sale of an investment asset to her mother, Lynne. If the facts
and circumstances prove that the selling price was an arm's length market price, Sandy can
recognize the loss.
FALSE
Learning Objective: 08-03 Explain why the tax law disallows losses on related party sales.
14. The gain or loss recognized on any disposition of a capital asset is characterized as capital
gain or loss.
FALSE
The disposition must be a sale or exchange to result in a capital gain or loss.
Difficulty: 3 Hard
Learning Objective: 08-04 Identify the two components of the capital gain or loss definition.
15. The characterization of income as ordinary or capital gain has no relevance for financial
reporting purposes.
TRUE
The characterization affects only the tax treatment of the income.
Difficulty: 3 Hard
8-32
16. The same asset may be an ordinary asset in the hands of one taxpayer and a capital asset in
the hands of a different taxpayer.
TRUE
17. For tax purposes, every asset is a capital asset unless it falls into one of eight categories of
noncapital assets.
TRUE
18. Every gain or loss realized on the disposition of property is ultimately characterized as
either ordinary or capital for tax purposes.
TRUE
19. Both corporate and individual taxpayers can deduct capital losses to the extent of capital
gains.
TRUE
Difficulty: 1 Easy
Learning Objective: 08-05 Apply the limitation on the deduction of capital losses.
8-33
20. Both corporate and individual taxpayers can carry back a net capital loss to the three prior
taxable years.
FALSE
Only corporate taxpayers can use a net capital loss as a carryback.
21. Both corporate and individual taxpayers may be taxed at a preferential rate on net capital
gain.
FALSE
Only individual taxpayers have preferential capital gain tax rates.
22. Because land is nondepreciable, it is always a capital asset.

FALSE
Land held as inventory is an ordinary asset, and land used in a trade or business is a Section
1231 asset.
23. The sale of business inventory always generates ordinary income or loss.
TRUE
Difficulty: 1 Easy
8-34
24. Verno Inc. purchased business equipment in March and sold it in November. Verno's gain
or loss recognized on the sale is ordinary.
TRUE
The business equipment is not a capital asset or a Section 1231 asset (because Verno did not
hold it for more than 12 months).
Difficulty: 3 Hard
Learning Objective: 08-06 Apply the Section 1231 netting process.
25. A taxpayer cannot compute its net Section 1231 gain or loss for a taxable year until the year
closes.
TRUE
Difficulty: 1 Easy
26. The general rule is that a net Section 1231 loss is treated as a capital loss and a net Section
1231 gain is treated as ordinary income.
FALSE
Just the opposite!
Difficulty: 1 Easy
27. JG Inc. recognized $690,000 ordinary income, $48,000 net Section 1231 gain, and $77,000
net capital loss this year. JG's taxable income is $690,000.
TRUE
8-35
28. Langtry Corporation recognized $798,000 ordinary income, $13,000 net Section 1231 loss,
and $6,000 net capital loss this year. Langtry's taxable income is $785,000.
TRUE
29. Tullia Inc. recognized $500,000 ordinary income, $22,600 net Section 1231 gain, and
$6,000 net capital loss this year. Tullia's taxable income is $522,600.
FALSE
Tullia can deduct the capital loss against the Section 1231 gain for taxable income of $516,600.
30. Milton Inc. recognized a $1,300 net Section 1231 loss in 2011. If Milton recognizes a
$5,000 net Section 1231 gain in 2012, it must characterize $1,300 as ordinary income.
TRUE
Learning Objective: 08-07 Incorporate the recapture rules into the Section 1231 netting process.
31. Milton Inc. recognized a $16,900 gain on sale of depreciable equipment held for three years.
If Milton's accumulated MACRS depreciation on the equipment is $16,900 or more, the entire
gain is ordinary income.
TRUE
8-36
32. Stone Company recognized a $7,700 loss on sale of depreciable equipment held for three
years. If Stone's accumulated MACRS depreciation on the equipment is $7,700 or more, the
entire loss is ordinary.
FALSE
The loss is a Section 1231 loss. Depreciation recapture only applies to gains.
Difficulty: 3 Hard
33. Mr. Jason realized a gain on sale of a residential apartment complex that he had placed in
service in 1993. Accumulated MACRS depreciation on the complex was $311,800. The entire
gain is characterized as Section 1231 gain.
TRUE
The post-1986 tax depreciation was computed under the straight-line method, so there is no
Section 1250 recapture.
34. CBM Inc. realized a $429,000 gain on sale of a commercial office building that the
corporation placed in service in 1993. Accumulated MACRS depreciation on the complex was
$311,800. The entire gain is characterized as Section 1231 gain.
FALSE
CBM must recapture $62,360 ($311,800 * 20%) as ordinary income.
Difficulty: 3 Hard
8-37
35. The abandonment of business equipment with a $6,019 adjusted basis results in a $6,019
Section 1231 loss.
FALSE
Because an abandonment loss is not a sale or exchange, any realized loss is ordinary.
Difficulty: 3 Hard
Learning Objective: 08-08 Describe the tax consequences of dispositions other than sales or exchanges.
36. Ms. Cregg has a $43,790 basis in 2,460 shares of ABD Inc. common stock. ABD recently
declared bankruptcy and announced that its common stock is worthless. As a result, Ms. Cregg
can recognize a $43,790 ordinary loss.
FALSE
Ms. Cregg can recognize a $43,790 capital loss under the tax rule for worthless securities.
37. Abada Inc. has a $925,000 basis in 100% of the stock of AbWest Inc., which derives all its
income from a manufacturing activity. If Abada determines that the AbWest stock is worthless,
it can recognize a $925,000 ordinary loss.
TRUE
38. Netelli Inc. owned a tract of land with a $175,000 basis that was subject to a $228,500
nonrecourse mortgage. Netelli defaulted on the mortgage, and the creditor foreclosed on the
land. Netelli must recognize a $53,500 gain on the disposition of the land.
TRUE
8-38
loss.
TRUE
loss.
FALSE
The loss equals the adjusted basis of the equipment.
41. A casualty loss realized on the destruction of depreciable business property is characterized
as a Section 1231 loss.
FALSE
Because the disposition was not a sale or exchange, the casualty loss is ordinary.
8-39
Multiple Choice Questions
42. Lenoci Inc. paid $310,000 for equipment three years ago. This year, it sold the equipment
for $200,000. Through date of sale, accumulated book depreciation was $93,840 and
accumulated tax depreciation was $147,327. Which of the following statements is true?
A. The sale results in a $53,487 favorable temporary book/tax difference.
B. The sale results in a $53,487 unfavorable temporary book/tax difference.
C. The sale results in a $53,487 unfavorable permanent book/tax difference.
43. Skeen Company paid $90,000 for tangible personalty three years ago and elected to expense
and deduct the cost under Section 179. This year, Skeen sold the personalty for $52,700.
Accumulated book depreciation through date of sale was $31,000. What is the effect of the sale
on Skeen's book income and taxable income?
A. $6,300 book loss: $52,700 tax gain
B. $6,300 book loss; -0- tax gain
C. $6,300 book and tax gain
Difficulty: 1 Easy
8-40
44. Noble Inc. paid $310,000 for equipment three years ago. This year, it sold the equipment for
$200,000. Through date of sale, accumulated book depreciation was $93,840 and accumulated
tax depreciation was $147,327. Assuming a 35% tax rate, what is the effect of the sale on
Noble's deferred tax accounts?
A. $18,720 increase in deferred tax assets
B. $18,720 increase in deferred tax liabilities
C. $18,720 decrease in deferred tax liabilities
D. No effect on deferred tax accounts
The $53,487 excess of tax depreciation over book depreciation resulted in an $18,720 deferred
tax liability on Noble's balance sheet. The excess depreciation reversed as $53,487 excess tax
gain on sale of the asset, which resulted in a reduction of the deferred tax liability to zero.
Difficulty: 3 Hard
45. Six years ago, Alejo Company purchased real property by paying $250,000 cash and giving
the seller its $1 million note for the balance of the purchase price. This year, Alejo deducted
$30,800 depreciation on the property and made a $125,000 principal payment on the note.
Which of the following statements is false?
A. The depreciation deduction reduced Alejo's adjusted tax basis in the real property.
B. The principal payment increased Alejo's equity in the real property.
C. The principal payment reduced Alejo's tax basis in the real property and the balance due on
the note.
D. None of the above statements is false.
The principal payment had no effect on the tax basis in the real property.
Difficulty: 1 Easy
8-41
46. O&V sold an asset with a $78,300 adjusted tax basis for $100,000. The purchaser paid
$30,000 in cash and assumed O&V's $70,000 mortgage on the asset. Compute O&V's net cash
flow from the sale assuming a 35% tax rate.
A. $22,405
B. $13,095
C. $14,105
$30,000 cash payment - $7,595 tax ($21,700 gain * 35%)
47. This year, Ms Lucas sold investment land for $125,000 cash plus the purchaser's
assumption of a $50,000 mortgage on the land. Ms. Lucas's tax basis in the land was $93,000. If
any recognized gain is taxed at 15 percent, compute the after-tax cash flow from the sale.
A. $62,300
B. $69,700
C. $112,700
D. $162,700
$125,000 cash payment - $12,300 tax ($82,000 gain * 15%)
48. Philp Inc. sold equipment with a $132,900 adjusted tax basis for $200,000. The purchaser
paid $20,000 in cash and assumed Philp's $180,000 mortgage on the asset. Compute Philp's net
cash flow from the sale assuming a 35% tax rate.
A. $23,485
B. $20,000
C. -0-
$20,000 cash payment - $23,485 tax ($67,100 gain * 35%) = ($3,485) net cash flow
Difficulty: 3 Hard
8-42
49. Winslow Company sold investment land to an unrelated purchaser. The purchaser paid
$250,000 cash, assumed Winslow's $600,000 mortgage on the land, and gave Winslow its
$580,000 ten-year, interest-bearing note. Compute Winslow's amount realized on sale.
A. $250,000
B. $830,000
C. $850,000
D. $1,430,000
Difficulty: 1 Easy
50. The installment sale method of accounting applies to which of the following?
A. $89,300 gain realized on sale of business inventory.
B. $798,600 gain realized on sale of common stock in a publicly held corporation.
C. $(41,500) loss realized on sale of land used in a trade or business.
Difficulty: 1 Easy
51. O&V sold a business asset with a $78,300 adjusted tax basis for $100,000. The purchaser
paid $30,000 in cash and gave O&V a note for the $70,000 balance of the price. O&V will not
receive a payment on the note until next year. Compute O&V's gain recognized under the
installment sale method.
A. $7,690
B. $6,510
C. $4,920
$30,000 cash payment * ($21,700 gain/$100,000 contract price)
Difficulty: 1 Easy
8-43
52. Dolzer Inc. sold a business asset with a $474,000 adjusted book and tax basis for $775,000.
The purchaser paid $100,000 in cash and gave Dolzer a note for the $675,000 balance of the
price. Dolzer will not receive a payment on the note until next year. Assuming that Dolzer uses
the installment sale method, compute Dolzer's book and tax gain in the year of sale.
A. Book gain $301,000; tax gain $100,000
B. Book and tax gain $38,839
C. Book gain $301,000; tax gain $38,839
$100,000 cash payment * ($301,000 gain/$775,000 contract price) = $38,839 tax gain
In 2012, TPC received a $105,500 payment on the note ($67,500 principal + $38,000 interest).
Assuming that TPC is using the installment sale method, compute its gain recognized in 2011.
A. $26,216
B. $40,976
C. $67,500
$67,500 principal payment * ($301,000 gain/$775,000 contract price) = $26,216 recognized

gain.
8-44
In 2012, TPC received a $67,800 payment on the note ($40,000 principal + $27,800 interest). In
2012, TPC's use of the installment sale method results in a:
A. $10,325 favorable permanent book/tax difference
B. $17,496 unfavorable temporary difference
C. $17,496 favorable temporary difference
$40,000 principal payment * ($135,000 gain/$523,000 contract price) = $10,325 recognized

gain in excess of -0- book gain. The difference is a reversal of the favorable book/tax difference
in the year of sale.
Difficulty: 3 Hard
55. The installment sale method of accounting does not apply to which of the following sales?
A. Sale of 12-acre tract of land held as inventory by a real estate developer
B. Sale of business equipment
C. Sale of U.S. Treasury notes
D. The method does not apply to a. and c.
8-45
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Malleco, south of Bio-Bio, is peculiar in the fact that it alone of the
Provinces touches neither the Pacific nor Argentina, having a strip of
Bio-Bio and Cautín on the east and Arauco on the west. The
mountainous eastern section is heavily wooded and the fertile
central plain with a mild damp climate is celebrated for its crops of
wheat.
Cautín, extending all the way across the country, touches three
Provinces on the north, Arauco, Malleco, and Bio-Bio. Here are
plains, mountains, and valleys, with much rainfall and luxuriant
vegetation of forest, grass, and agriculture. Excellent timber and
tannin extracts, fruit and cattle, produce wealth, and coal and gold
await exploitation.
Valdivia, south of Cautín, also extends across the country. Here
are lower mountains, many passes into Argentina, extensive forests,
several lakes, much rain; but a healthful climate, luxuriant
vegetation, with profitable agriculture, forest products, and cattle
breeding.
Llanquihue follows, extending south to the Gulf of Ancud and
beyond. The present southern terminus of the Longitudinal Railway
is the capital, Puerto Montt, at the head of the Gulf. This is largely a
forest region, though in the valley of the lakes are fertile lands suited
to grazing and agriculture, both of which industries are increasingly
followed. The climate is rather cool but equable.
Chiloé, the last of the Provinces, consists of the large island of
that name covering about 560 square miles, other islands much
smaller, and a long archipelago called Chonos extending to the
peninsula of Taitao. The island, Chiloé, is largely covered with
forests which, strange to say, have a somewhat tropical character,
with fine timber, dense undergrowth, and trailing vines; for the
climate, with excessive rainfall, is extremely mild for the latitude,
which corresponds to that of Massachusetts. Cereals, potatoes, and
fruit are grown, and many pigs are raised; though forestry, and
fishing are of greater importance.
The Territory of Magallanes extends from the 47th parallel south
including the mainland and islands, with mountains, rivers, forest,
and plains. On the coast the climate is not severe; in the interior it is
more rigorous. Cattle and sheep raising are the most profitable
industries; whaling and forestry are important.
CHAPTER XXXI
CHILE: PORTS AND TRANSPORTATION
Ports
Although Chile cannot boast of many excellent harbors, with her

extended coast line her ports are naturally numerous; 59 is the
official number, of which 15 are primary ports with custom houses,
while the rest are dependent, save Punta Arenas, which is proudly
apart as a free port, the only one in this part of the world. The
primary ports are not necessarily those with the best harbors, but
were made such on account of the demands of commerce.
The service along the coast is similar to that of Peru except that
the boats of the Peruvian Steamship Line do not go beyond their
own shores, while there is additional service by Chilian steamers.
Before the War 40 per cent of the engaged shipping was British.
Service to and from Europe, formerly by way of the Straits, long
ended at Valparaiso, later extending to Callao, and for one or two
sailings to Panamá. The exigencies of war interfered with the
execution of plans which are now being carried out or modified.
European express service below Panamá is likely to be confined to
the ports of Callao, Mollendo, Arica, Iquique, Antofagasta,
Valparaiso, and Punta Arenas, with a possible call for coal at
Coronel. Other express service may include Coquimbo and
Talcahuano. Aside from the leading coastal lines a few companies
operate smaller ships locally; on the sea, and 843 miles on the
several navigable rivers at the south. There is also service among
the southern islands and to Juan Fernandez, 400 miles to the west.
Valparaiso, as the most important Pacific port south of Panama,
deserves especial attention. This rapidly growing city, population
about 200,000, to one coming from the north seems quite European,
with an atmosphere more crisp and businesslike than that of courtly
Lima or picturesque La Paz. The semicircular bay is called a good
harbor except when the north winds blow, as they are liable to do in
winter. Some years ago a British steamer lying at anchor, in an
unusually strong blow was sunk with all on board. A breakwater
expected to avert such danger, has for some time been in
construction; but the depth of water off shore has made the work
difficult. Freight was formerly discharged into lighters and people into
rowboats, the steamers anchoring at some distance from shore.
Now, however, a fiscal mole 100 feet long, one half with a depth of
water of 43 feet, the rest of 36 feet, provides all facilities. Valparaiso
has fair hotels, providing insufficient accommodation for the rapidly
increasing travel and business. In many respects the city is quite up
to date, but unhappily here and in Santiago Americans in winter
suffer more with the cold when sitting indoors than in La Paz and
Lima, though for walking outside it is comfortable enough with the
temperature near freezing. As a rule dwelling houses have no
heating apparatus, no stoves, but in some hotel dining rooms electric
heaters are employed, and oil stoves may be provided for Americans
in their rooms. While Chile has coal mines, their production is
insufficient for the use of shipping and of their varied industries, and
the people are not accustomed to use either the native or the
imported article for heating purposes.
The business section of Valparaiso is on a narrow strip of shore
between the bay and the amphitheatre of hills, the level sector
varying in width from two blocks to half a mile. Climbing up the
slopes and crowning the hill tops is most of the residential district.
The business section, largely destroyed by an earthquake in 1906,
has been rebuilt in a more substantial manner, and it well compares
with other cities of its size. Ascensors run by cable on inclined
planes are in general use for the ascent of the bluffs, though paths
and a few carriage roads wind steeply upward in the cañons here
and there separating the hills, some of which rise to a height of 1000
feet. The suburb of Viña del Mar, population 34,000, a fashionable
summer resort with a fine beach and club house, distant a half hour
by rail, is much frequented by the foreign devotees of golf, tennis,
and other athletic sports.
Other Ports. Of the other principal ports we have observed that
Arica is the terminus of the Arica-La Paz Railway, that Iquique is
important for nitrates, Antofagasta for nitrates, copper, and as the
medium of commerce with Bolivia by the old railway to Oruro and
now to La Paz; Coquimbo as the port of a province with both mineral
and agricultural wealth. Below Valparaiso are better harbors.
Concepción, the largest city south of Santiago, 350 miles distant, is
spoken of as the outlet of the rich Province of that name, but being
12 miles from the mouth of the Bio-Bio River it is not a real seaport
and is served by Talcahuano, 9 miles away, which has one of the
best harbors on the coast. For this reason, though a much smaller
city, population 24,000, it was selected as a military port and for the
Government dry docks. A little farther south on Arauco Bay are
Coronel and Lota, both important coaling stations, at one of which all
steamers call; Lota, the larger city, has all conveniences for shipping.
At the tip of the mainland in the Straits is Punta Arenas, not visited
by the regular coasting steamers, but a port where every passing
ship is likely to make a brief call.
Railways
While the Chilians have always cultivated a taste for the sea, for
strategical more than commercial reasons railway construction has
of late been strongly favored. In this medium of traffic Chile in
proportion to her area is far ahead of the other West Coast countries.
It is true that the difficulties of topography are less. The oldest
existing line in Latin America was here constructed in 1849 by a
Bostonian, William Wheelright, who later founded the Pacific Steam
Navigation Company, the earliest giving regular steamship service to
Europe from the West Coast. This first railway line was from the port
Caldera to the mining town Copiapó. The line from Valparaiso to
Santiago, also constructed by Americans, was finished in 1863.
Government ownership is popular in Chile, and of the 8000 miles of
road in operation the State owns over 5000, with considerable
extensions planned. Unfortunately six different gauges have been
used, varying from 2 feet 6 inches on the Antofagasta Bolivia Line to
5 feet 6 inches on the Central Railway.
The Central Railway. This is a Government Line connecting
Valparaiso with the capital Santiago, express trains with American
parlor cars making the run of 117 miles in four hours. The road is
now to be electrified. South along the rich Central Valley, the same
Railway runs through sleeping cars to Valdivia and to Puerto Montt,
the latter city 750 miles from Santiago. This section is well worth a
visit, whether from a scenic or a business point of view. A bridge
1400 feet long and 300 above the bed of the Malleco River cost over
$1,000,000.
There are many branches from the main line, some of these
privately owned; most of them to coast ports, a few towards the
Cordillera. Valdivia is the most southern ocean port to which a
branch extends. Farther north, the third city of Chile, Concepción, is
favored, and Talcahuano near by. From Concepción a coast road
leads south to Lota, Coronel, and beyond. From Talca a line goes to
Constitución, of some importance for agriculture, shipyards, and gold
mining. Another branch goes to the port Pichilemu; from Santiago
one extends 72 miles to the port San Antonio, nearer the capital than
is Valparaiso but a secondary port to be improved by the building of
docks. The Central Railway obviously forms a very important part of
the real longitudinal railway, but the section which has the name
Longitudinal begins farther north.
The South Longitudinal. From Calera on the Valparaiso-Santiago
Railway a branch leads 45 miles to Cabildo, where begins the
Longitudinal proper. This because of construction difficulties is of
narrow gauge, one metre. On account of poor equipment and
service, and the competition of steamship lines along the coast, its
traffic is at present small; but with better facilities and increase of
population it will be of much value. At last accounts there was weekly
service to Antofagasta with two changes of cars, not counting the
one from Valparaiso or Santiago in order to reach Cabildo. Here,
three hours from Santiago, the South Longitudinal is taken to the city
of Copiapó; for the Longitudinal has two sections. The ride is through
a fairly pleasant country with varied scenery, the region being partly
agricultural and partly mineral. In this section are heavy grades,
rising to 6 per cent, requiring 28 miles of the rack system. Branches
or other connecting lines here and there reach the sea. The road
passes through the important port Coquimbo, and the adjoining
Serena, at which point, 200 miles from Valparaiso, the desert land
begins; though in river valleys there is still some verdure. From
Vallenar on the main line a branch runs 31 miles to the port Huasco.
A private line from the port Carrizal, 92 miles north of Huasco and 73
south of Caldera, crosses the Longitudinal. At Copiapó we come to
the old line from Caldera, a fairly good port, shipping copper and
doing considerable other business, though not a port of the first
class. A branch in the other direction extends to San Antonio.
The North Longitudinal. At Copiapó we change to the North
Longitudinal from which there is a branch to Chañaral, about 50
miles north of Caldera, on a large but exposed bay in one of the
richest mineral districts of Atacama, with large smelting works, and
exporting gold, silver, and copper. A private (British) railway system
of 184 miles, crossing the Longitudinal, serves a nitrate district and
the port of Taltal, 100 miles south of Antofagasta; a primary port on a
well protected bay, with piers fitted with steam cranes, a centre of the
nitrate and copper industries. Taltal is a modern town with important
business houses. Besides gold, silver, and copper, the Province has
some undeveloped nitrate land.
Farther on at Aguas Blancas, a railway belonging to the Bolivia-
Antofagasta Company runs to Caleta Coloso, a port six miles south
of Antofagasta and connected by rail with that city as well as with
various nitrate properties. Farther still the Longitudinal crosses the
Antofagasta-Bolivia Railway at Baquedano, where some traffic is
exchanged. It is the intention of the Government to construct its own
line to Antofagasta and to the port of Mejillones some miles north.
Beyond this crossing, from Toco on the Longitudinal, the Anglo-
Chilian Nitrate and Railway Company’s Line branches to the port of
Tocopilla. At last Pintados, the one time terminus is reached, where
connection is made with the Nitrate Railways, which go on to Iquique
and Pisagua. But in spite of this the Government Line is now being
prolonged to the former city. It is intended ultimately to extend the
main line to Arica, 175 miles farther, a section likely to be
unprofitable commercially but desired for other reasons. From Arica
there is a railway to Tacna, near the Peruvian border, hence on
completion of this section there would be through rail service from
near the northern border to Puerto Montt in the far south, a primary
port on the Gulf of Reloncavi. The length of the road from Puerto
Montt to Jazpampa the present terminus, east of Pisagua, is 1902
miles; to Taratá, the most northern town in the mountains, the
distance is 207 miles more.
The Antofagasta-Bolivia Railway. The Bolivian section of the
important Antofagasta Railway has already been referred to. That in
Chile deserves further consideration. British owned, like most of the
Chilian railways not belonging to the State, it is the longest and most
important of these. Although uncommonly narrow with a 2 foot 6 inch
gauge, the sleeping cars are more comfortable than some with
double the width. The road operates 835 miles of main track to La
Paz, 518 of these in Chile. There is semi-weekly service to La Paz in
practically two days, besides local trains. One thousand, two
hundred and fifty miles of track are controlled by the Company. The
climb begins at once, the road in 18 miles getting 1800 feet above
the sea. At km. 36 a branch 70 miles long goes to the Boquete
Nitrate Fields, altitude 5622 feet. At Prat, km. 59, a branch goes
down to Mejillones, a new port, opened by the Company in 1906,
called the finest harbor on the coast, capable of holding the fleets of
the world (it was said when these were smaller) and so protected
that shipping suffers no inconvenience from bad weather. Tocopilla,
37 miles north of Antofagasta, has direct rail connection with that city
by a line 43 miles long. The main Antofagasta line, crossing the
Longitudinal at km. 96, at km. 116 enters the principal nitrate district
of this region and leaves it 35 miles beyond. In this section are 24
oficinas, as the nitrate plants are called, some of them models of
their kind.
Going in either direction this part is traversed at night; otherwise
one might be refreshed by the sight of a little green at Calama, 149
miles from Antofagasta, at six a.m. This was a copper mining centre
in Inca days and a smelter is here now. At this altitude some persons
stop a day, a good plan if one is not sure of his heart; though oxygen
is now carried for use in emergency. At km. 254 is a short branch, 6
miles, to Chuquicamata, to be referred to later. Just beyond the
Conchi station is a graceful viaduct with six lattice girder spans of 80
feet each, supported on steel trestle towers. This, called the highest
viaduct in the world, is 336 feet above the water of the Rio Loa, at an
altitude of nearly 10,000 feet. Here a branch line runs to the copper
mines of Conchi Viejo. At San Pedro station, 195 miles, at 10,600
feet altitude, are reservoirs blasted from the solid rock, on which the
Company spent $6,000,000 to supply Antofagasta, the nitrate fields,
and the railway with water. The water comes from three different
places, one of them 37 miles northeast and 14,500 feet above the
sea: this source capable of supplying 6000 tons of water daily
through 11-inch pipes.
The road now passes two snow capped volcanoes, from one of
which smoke may be rising, and crosses a stream of lava one-third
of a mile wide and several miles long, to the summit of the main line,
13,000 feet. Soon after, a borax lake belonging to a British company
may be seen; 24 miles long, it is the largest single deposit in the
world and the chief source of the world’s supply. At Ollague, where
snow storms occasionally impede traffic, is a branch to the rich
copper mines at Collahuasi. The Bolivian frontier is soon afterward
crossed, and at Uyuni a change is made to the broader gauge line to
La Paz.
The Trans-Andine Railway. Of all the railroads of Chile, the
Trans-Andine is naturally the most famous, as a part of the only
trans-continental railway south of Panama; but financially, as yet it is
hardly a success. With post-war increase of traffic, there will
doubtless be an improvement. The Trans-Andine section of metre
gauge begins at Los Andes, altitude 2723 feet, 88 miles from
Valparaiso. A change is here made from the State Line, 5.5-foot
gauge. It is a distance of 43 miles to the tunnel, a steep climb up the
Aconcagua River Valley, with a maximum grade of 8 per cent; 20
miles of rack railway are employed. There are 25 tunnels, and on the
Aconcagua River or its branches, 118 bridges. The scenery is wild
and the journey delightful. Sheds have been erected against snow
and land slides. Up to 1916 the road was closed for several months
each winter; but with an increase of sheds and with a force of men
continually digging, the road was kept open through the years 1916,
’17 and ’18; it was seriously blocked in July, 1919. While previously
passenger traffic was the more remunerative, in 1916 unusual efforts
were made for the benefit of important freight which it was
impossible to ship by sea.
The tunnel is at a height of 10,486 feet, its length is 10,385 feet,
each practically two miles. The boundary line is near the middle,
each country building to that point; but the whole is operated as one
line from Los Andes to Mendoza. The line was opened in the
Centennial year, April 16, 1910, in time for the Exposition at Buenos
Aires. The cost of the Chilian section was about $15,000,000.
Operation is at a loss, interest being paid by the Government. The
capitalization is $317,000 a mile. Fifteen Trans-Andine projects have
been put forward, most of them for the south, one from near Puerto
Montt. One in construction is from Talcahuano to Bahia Blanca by
way of Temuco. A road from Punta Arenas to the Loreto coal fields is
the most southern railway in the world, as that is the most southern
city. The early construction is expected of an important road at the
north from Salta in Argentina by Huaytiquina on the border to
Antofagasta. Of wagon roads there are said to be 20,000 miles.
The Arica-La Paz Railway is described on page 222.
CHAPTER XXXII
CHILE: RESOURCES AND INDUSTRIES
Although Chile is often compared to California, to which State it

has some but not a close resemblance in length, partial dryness,
earthquakes, and fruit, the specialty of Chile is not shared by
California. Chile and nitrates are almost synonymous terms. A
thought of one suggests the other. The greater part of the nitrate
country earlier belonged to Peru, some also to Bolivia; and both
countries still bewail their loss.
Mining
The Nitrate Fields we know are in the north, chiefly in the

Provinces of Tarapacá, Antofagasta, and Atacama. If this desert land
does not blossom as the rose, it produces the wherewithal to make
other fields blossom, and the wealth to purchase the roses. The
richest deposits are mainly along a stretch of 300 miles from Pisagua
in Tarapacá, to Coquimbo. With an average width of 2¹⁄₂ miles, the
fields are at a distance of from 10 to 80 miles back from the coast,
and at a height of 2000-5000 feet. The deposits, which are not in
continuous fields, are sometimes on the surface, but oftener overlaid
with strata of earth several feet thick. The raw material called caliche
contains from 20 to 65 per cent nitrate of soda. After pickling in tanks
8-12 hours, the liquid, caldo, is run off, the sand and refuse dropping
to the bottom. When ready for export the article carries 15-16 per
cent nitrogen and 36 per cent sodium. Commercial nitrate is a white
cheese-like substance, which is used in manufacturing the highest
grade of gunpowder, also to produce nitric and sulphuric acid; but
the bulk of it in ordinary times is employed as a fertilizer, doubling
and tripling the harvest. Within recent years the demand and in
consequence the production has greatly varied, the partial recovery
in 1920 being soon followed by a depression.
A by-product is a yellow liquid, which being chemically treated
leaves a blue crystal, iodine, which costs as much an ounce as
saltpetre per 100 pounds. Being worth $700-$800 a cask it is
shipped in treasure vaults with bullion. The nitrate establishments
called oficinas provide good salaries, and the best possible quarters
for their officials, and they are interesting to visit. As a mineral, the
nitrate is distinguished from guano although believed by some to
have the same origin. British companies have long been engaged in
this industry. American interests have more recently acquired
holdings. The Du Ponts have three properties covering 14,000 acres.
The chief ports of this region are Iquique and Antofagasta,
Pisagua being a smaller port visited only by the caletero or the
strictly freight boats. Iquique is a more agreeable city than in former
days, when water was sometimes $2 a gallon, and people drank
champagne, they said, because water was too expensive. Now the
dust of the streets is laid by sprinklers, some people have bath
rooms, a few even fountains in patios. Antofagasta is also a desert
place, unattractive to look at, but with good shops, business houses,
and fair hotels. The water comes a distance of nearly 200 miles, the
source more than two miles above the sea.
Potash. In addition to nitrates Chile possesses extensive beds of
useful potash one of which is estimated to contain nearly 7,000,000
tons easy of exploitation.
Copper. The property of the Chile Copper Company (one of the
Guggenheim interests) at Chuquicamata is said to be the largest
copper deposit known in the world. About 2000 of the 9600 acres of
the claim are mineralized. The outcrop of copper is one and a half
miles in length. It has been proved below to a width of 1800 feet and
a length of 7500 feet. Ten of the 2080 shafts are over 1000 feet in
depth, and at 1500 feet the ore is of commercial value. Over
700,000,000 tons of positive and probable ore have been developed,
carrying an average value of 2.12 per cent copper. The reduction
plant has a capacity of 15,000 tons a day, the refinery of
180,000,000 pounds a year. With a 90 per cent extraction the yield is
96 pounds of copper per ton. At the port of Tocopilla, north of
Antofagasta, the Company has a power station where oil from
California is used to generate a power of 24,000-27,000 kilowatts
needed at Chuquicamata. This is transported by wire across country
a distance of 100 miles. At normal prices the cost of copper
production with delivery in New York or Europe is $121 a ton, or
about 6 cents a pound; higher with war time conditions which still
obtain (1921). From the 15,000 ton plant in full service 175,000,000
pounds of copper would be produced annually. In 1920, 55,617,000
pounds were produced, the largest amount from any mine in Chile.
In 1916 important mines belonging to the Calama Mining Company
were added to the Chile Company’s holdings.
The Braden Copper Company, another Guggenheim interest,
owns about 2300 acres in the Province of O’Higgins. They have a
concentrator, a smelting and converting plant, a hydro-electric power
plant with 800 kilowatt capacity and an electric and a steam railway;
the latter, 43 miles long, connecting the property with Rancagua,
which is on the Central Railway 43 miles southeast of Santiago. The
ore is of concentrating copper, a sulphide in brecciated andesite,
around an extinct volcano. It runs about 2.5 per cent, with an earlier
production cost in New York of 6.5 cents a pound, but now higher. In
1916, 1500-1800 men were employed. The plant, recently enlarged,
is not working to capacity. In 1917, 64,000,000 pounds were
produced, over 77,000,000 in 1918, with diminishing demand,
40,000,000 in 1920.
Another American syndicate has acquired the Tamaya Copper
Mines in the Province of Coquimbo between Ovalle and Tongoy, the
latter, a minor port 27 miles south of Coquimbo, sheltered from north
winds, with smelting works in the place. With an efficient pumping
plant and other improvements installed, the mines are expected to
yield large production. Other companies, native, British, and French
are engaged in copper mining at Carrizal and elsewhere.
Iron. Coquimbo, a Province with local importance for agriculture,
is notable for its deposits of iron ore, said to amount to a billion tons.
Only one of these has been worked, a deposit located at Tofo, about
four miles east of Cruz Grande, and 30 north of the city of
Coquimbo. This property was leased in 1913 by the Bethlehem Steel
Company from a French Company which had developed the mine to
some extent and produced ore. The ore appearing as the top of a
large hill will be mined by electric shovels and transported by an
electric railway to docks at Cruz Grande. The amount of ore is very
large though with exact tonnage undetermined. The Company is still
exploring the deposit at depth.
The mines and railway are completely equipped. At Cruz Grande a
basin dock has been constructed with large storage pockets into
which the ore will be discharged from the railway cars, and from
which it will go directly into the vessels. The Steel Company is
constructing steamers of 20,000 tons to carry the ore to the United
States for use in their furnaces. The ore is very pure averaging about
67.50 per cent iron. It is a dense ore reddish black in color, a mixture
of magnetite and hematite.
The French Company formerly controlling Tofo had erected a steel
plant at Corral intending to transport the ore thither. There is no iron
ore near there and the plant is not operating.
Of the other deposits in Coquimbo and farther north some are of
considerable size, but none is located so near the coast as Tofo and
none has been developed.
Other metals existing in Chile are at present of less importance
and slight operation. A moderate gold output accompanies the
production of copper, and there is some placer mining, especially in
the south. Deposits are known to exist in many Provinces from
Tacna to Tierra del Fuego. Silver too exists, but its production is
chiefly as a by-product. Lead, zinc, molybdenum, and tungsten are
exported in limited quantities.
Coal, following nitrates, is of the first importance among ordinary
minerals, a source of large wealth though the production, about
1,700,000 tons yearly, is insufficient for the needs of the country.
Little is therefore exported and a good deal is normally imported from
Great Britain and Australia; until recently a little only from the United
States. Most of the mines in operation, owned by ten companies, are
near the ports of Talcahuano, Coronel, and Lota. The coal is not
equal in quality to the British, but it has been used by steamships,
railways, and mines with fair results. Coronel or Lota, five miles apart
on Arauco Bay, one or the other, is a regular port of call for
steamships. The Cousiño property at Lota was purchased in 1852
and later was conducted by the son’s widow, under her
administration the greatest financial enterprise carried on by a
Chilian. At her death she was called the richest woman in the world,
leaving a property of $70,000,000. The capital of the company is
$20,000,000. The mines are one-fourth of a mile deep and extend
under the sea, where there is good rock and no drip. Here are
streets, restaurants, offices, stalls for horses, blacksmith shops, etc.
A British Company, the Arauco, in addition to coal properties
operates its own railway with 62 miles of main line and branches,
besides mining spurs. It has four daily trains from Concepción to
Lota, Coronel, and beyond, passing over the Bio-Bio River by a
bridge of 1¹⁄₄ miles, the longest in South America. Of coal about 1¹⁄₂
million tons are produced and as much more is imported.
Petroleum is believed by Chilians to exist in large quantities, but
the present development is infantile. It has been found in southern
Chile, on the Island of Chiloé and in the Patagonas district, as well
as in the north near the Bolivian frontier. Large quantities are
imported principally from Peru, normally about 400,000 tons a year.
Oil recently found in the Magallanes Territory is stated by experts to
be equal in quality to that found in Argentina. The extent of the
deposits seems to rival that of the famous fields of Comodoro
Rivadavia. Legislation to regulate the well drilling is proposed to
prevent inundation of deposits by subterranean streams, to restrict
the ownership to native Chilians or foreigners with Chilian families,
and to secure to the Government a 10 per cent royalty. A strong flow
of petroleum of great purity from a well about 300 feet deep has
recently been reported from Chiloé.
Sulphur comes from a largely producing mine at the foot of Mt.
Ollague, and from one of growing importance at Tacora on the Arica-
La Paz Railway. The deposits of Tacora are believed to contain 10 to
45 million tons of sulphur. In 1915 about 10,000 tons were produced
in Chile.
Salt. From various salt deposits, the salinas of Punta de Lobos
and several mountain lagoons, about $300,000 worth of salt was
produced, supplying the domestic market.
Borax is important, Chile furnishing about half of the world supply.
Agriculture
Of large importance and value are the agricultural interests

including fruit, although the imports of such products are nearly
double the exports in value. About one eighth of the area of Chile
consists of arable land. The production should be greatly increased.
Twenty million acres are still available, and with better methods
excellent results might be secured. In 1914-15 about 25,000,000
bushels of wheat were raised, half as many potatoes, and more than
half as much hay; besides barley, oats, beans, corn, etc.
Considerable wheat is exported with some barley, oats, rye, and
legumes. Of 15,000,000 acres suitable for wheat, only one fifth is in
cultivation. It grows well from Aconcagua to Cautín inclusive, but
farther south the crops are uncertain. They average 15-20 bushels
an acre. Six hundred thousand acres are devoted to alfalfa, which in
favorable places gives three crops a year and has roots ten feet
long, a distinctive variety being formed here. In irrigated valleys from
Coquimbo north, corn gives two fine crops annually. Potatoes
flourish from Concepción south, in Chiloé yielding 250-350 bushels
to the acre. Flax and sugar beets might be raised. Some agricultural
machines are now employed, in the neighborhood of 30,000.
Fruit. Delicious fruits of all temperate zone varieties and some of
the subtropical are raised, chiefly for home consumption, but with
export possibilities. Drying and canning of these is practised to some
extent, but might be done on a much larger and more profitable
scale. Excellent table grapes are raised; many vineyards devote their
product to wine making, the industry being especially developed in
the Provinces of Santiago, O’Higgins, and Colchagua. In the north,
wine is made of the port and sherry classes; in the central section
light wines of excellent quality, some of which are exported to the
neighboring countries. More wine however is imported of expensive
varieties. The vineyards are in general owned by natives, and
according to location are worth $200-$1000 an acre. Raisins are
produced in quantity.
Forestry
This might become a more important industry, though now

practised to a considerable extent. It has been customary to burn a
section of forest at the close of summer, February, to get rid of the
underbrush, and later to cut down the trees, which must have
suffered some injury. The forest area is below the Bio-Bio River. On
a tract of 100 square miles extending from near Valdivia north to
Temuco, the timber averages about 9000 feet to the acre. Farther
south the woods are denser, as on the Island of Chiloé. The greatest
extent of forest is in Valdivia, the next in Llanquihue and in Chiloé.
On this Island a 60 mile railway was constructed by the Government
from Ancud at the northwest to Castro south, on the east side,
making a part of the forest accessible. Oak, Chilian mahogany,
laurel, ash, pine, and other hard and soft woods are available. There
are in Chile 3000 saw-mills and some pulp and shingle mills. The
first and second grades of wood, used for floors and finished boards,
bring $12-$18 per 1000 feet, ash $25; the third grade is worth $8.
Shingles are $3 per thousand. From the forests comes the quillay
bark with a soapy substance for cleaning silk and fine linen, of which
$200,000 worth is annually exported to France, after being prepared
by two Chilian factories. Tannin, of which 15,000 tons are annually
used, is derived from bark of several kinds. With additional railways
planned and Government data furnished, there is opportunity for
good investments with moderate capital.
Stock Raising
Stock raising of various kinds is carried on quite extensively by

some large companies under British, German, or Chilian control,
often paying 20 per cent dividends. Sheep are in the lead,
numbering probably 6,000,000, cattle 3,000,000, horses 725,000,
half as many goats, a third as many pigs, fewer donkeys, mules,
alpacas, and llamas. The horses are good, larger than those in Peru,
and noted for their excellent trotting, some making this as easy as a
good pace or canter. In 1916, 20,000,000 pounds of wool were
produced, half of this in Magallanes Territory not far from Punta
Arenas, where there are more than 3,000,000 sheep. The meat is of
the finest quality; the farther south the better the wool in thickness
and length of staple.
The cattle are improving with the introduction of Shorthorns and
Herefords; there is some export, especially to Bolivia. The 3,000,000
at present might be increased ten fold. A British company is
constructing a frigorifico at Puerto Montt. The dairy industry is
important, with good cheese, bottled milk, and some condensed.
Goats are numerous in the mountains. Apiculture is practised and
fine honey is made. Fisheries are of great importance and value, at
Juan Fernandez, as also along the coast.
Manufacturing
Such industries are more developed in Chile than in any of the

countries previously considered. The 6200 manufactories with
80,000 operatives and an investment of $250,000,000 show great
diversity. There are saw mills, flour mills, breweries, sugar refineries,
some coarse sugar being imported from Peru, tanneries, furniture,
and shoe factories, with others commonly found. A cement factory
pays a quarterly dividend of 5 per cent, a brewery gave a semi-
annual dividend of 15 per cent. A new one is planned for Arica. More
than $12,000,000 are invested in the leather industries, with an
output worth $20,000,000. Twenty-two or more shoe factories are
scattered in various cities. Clothing and textiles are next in value of
production, followed by $10,000,000 worth of furniture and
woodwork. Ship building is important.
Investments
Activities in Chile in the immediate future for which about
$15,000,000 have been appropriated by the Government include
work or equipment on railways, roads, bridges, barracks,
waterworks, sewer systems, building construction, and port works.
These furnish opportunities to which many others may be added.
The possibilities in agriculture, fruit raising and canning are obvious;
those in fisheries, saw mills and lumber, development of water
power, in factories of various kinds may be noted, as well as for large
capitalists in mining. A $10,000,000 contract for the electrification
and equipment of four zones of the Government railways has been
concluded with a combination of several American interests.
THE EAST COAST

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Principles of Taxation for Business and

Investment Planning 2013 16th Edition

True / False Questions

22. Because land is nondepreciable, it is always a capital asset.

Multiple Choice Questions

61. Which of the following is a capital asset?

62. Which of the following is a capital asset?

What is the effect of the three sales on Gupta's taxable income?

74. Which of the following is a Section 1231 asset?

75. Which of the following assets is not a Section 1231 asset?

As a result of the sale, the Bathgates should recognize:

Chapter 08 Property Dispositions Answer Key

True / False Questions

The disposition must be a sale or exchange to result in a capital gain or loss.

The characterization affects only the tax treatment of the income.

Only corporate taxpayers can use a net capital loss as a carryback.

Only individual taxpayers have preferential capital gain tax rates.

22. Because land is nondepreciable, it is always a capital asset.

Just the opposite!

CBM must recapture $62,360 ($311,800 * 20%) as ordinary income.

The loss equals the adjusted basis of the equipment.

Multiple Choice Questions

$30,000 cash payment - $7,595 tax ($21,700 gain * 35%)

$125,000 cash payment - $12,300 tax ($82,000 gain * 15%)

$30,000 cash payment * ($21,700 gain/$100,000 contract price)

$67,500 principal payment * ($301,000 gain/$775,000 contract price) = $26,216 recognized

$40,000 principal payment * ($135,000 gain/$523,000 contract price) = $10,325 recognized

Although Chile cannot boast of many excellent harbors, with her

Although Chile is often compared to California, to which State it

The Nitrate Fields we know are in the north, chiefly in the

Of large importance and value are the agricultural interests

This might become a more important industry, though now

Stock raising of various kinds is carried on quite extensively by

Such industries are more developed in Chile than in any of the

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